What lies in store for Irish Nationwide after Fingleton?

 

MICHAEL FINGLETON apparently declined an offer from staff at Irish Nationwide to host a retirement party marking the end yesterday of his 37 years running the building society.

The man, better known as “Fingers” in the banking community, didn’t want any fuss or the potential for any further publicity surrounding his departure.

His retirement follows a barrage of public and political criticism over his lucrative pay and pension at an institution badly affected by the banking crisis. It was a subdued end to a colourful and, until last year, highly profitable career in Irish banking.

Mr Fingleton leaves the building society in a precarious position, relying on the continued support of Government through the guarantee scheme to raise funding from bond investors to keep the institution in business.

Irish Nationwide has the not-insignificant task of rolling over €2.2 billion worth of funding this year.

The recent extension of the bank guarantee on individual bond sales beyond the initial two-year duration will certainly support the society.

However, rising bad debts and the building society’s heavy exposure to the commercial property and development sectors in Britain and Ireland poses serious problems for the future of the lender.

The performance of the building society fell off a cliff in 2008 as bad loans spiralled. Irish Nationwide made a pretax loss of €280 million after writing off €464 million on bad loans – a 10-fold increase on the 2007 figure.

Loan losses on its balance sheet came to 4.95 per cent, which includes 11.4 per cent of the Irish commercial loans, reflecting the heavy hit taken on the collapse of the Irish property sector.

The annual loss compared with a pretax profit of €391 million in 2007, marking the peak of the spoils reaped during the boom.

In the four-year period to the end of 2007, Irish Nationwide made total profits of €942 million. Mr Fingleton was paid a total of €6.5 million over this period.

These profits will be overshadowed by the €1.3 billion in loan write-offs which analysts at investment bank JP Morgan estimate the building society will post over the next two years.

The analysts said in a report in March (before the 2008 results were published) that Irish Nationwide would need further investments of €900 million to top up its existing capital base of €1.2 billion.

In those most recent results, for the first time, Irish Nationwide disclosed a far greater level of detail on its overall €10.5 billion loan book, breaking down loans according to risk.

The society classified almost a third of its commercial property loans, or €2.6 billion of a €8.2 billion book, as either impaired or having “an increased risk profile and require additional management attention”.

Irish Nationwide’s top 30 customers owed 48 per cent of all loans, of which loans to UK customers amounted to 67 per cent. In other words, the building society has a large level of exposure concentrated among a small number of heavy borrowers.

The heavy growth of Irish Nationwide’s commercial loan book, secured mostly on properties in Britain, Ireland and further overseas, came at the boom’s headiest time. The society’s commercial loans almost doubled to nearly €10 billion between 2005 and 2007.

Among commercial property loans, €4.8 billion is to real estate renting and business and €1.6 billion is on construction.

The society reduced the size of its commercial loan book to €8.2 billion, though a large part of that reduction was due to the decline in the value of sterling. A large portion of these loans could end up in the State’s “bad bank”, the National Asset Management Agency (Nama), given the scale of the building society’s lending to developers and any further loans secured on these exposures.

This will leave Irish Nationwide a shell of its most recent self, primarily with €2.3 billion worth of residential loans forming the largest segment of its loan book.

“If they set up Nama in the way that they say they are doing, it will leave Irish Nationwide with a very small loan book,” said Oliver Gilvarry, head of research at stockbrokers, Dolmen Securities.

“The vast majority of the €8 billion will be moved into Nama. Irish Nationwide as an independent entity will not be sustainable.”

Mr Gilvarry believes Irish Nationwide’s future lies in “a super-mutual” or so-called “third force” in Irish banking to counter the main Irish banks, Allied Irish Banks and Bank of Ireland.

He says the building society is likely to be merged with EBS building society and possibly Permanent TSB, the banking division of Irish Life Permanent.

This would create a stronger domestic entity over which the Government could exert greater control.

Ironically, Irish Nationwide’s future could lie in the tradition on which it was built in Mr Fingleton’s early decades in charge of the mutual – building up savings from customers and providing home loans.